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The US petfood report

The primary market driver in the US continues to be conversion to higher-priced petfoods

Almost half of all dogs and cats are 6 or more years old.

Higher prices rather than volume increases continue to drive
retail dollar sales gains in the US petfood market. There is
strong consumer demand for premium products across all
categories. Upscale petfoods cover all bases: natural/organic,
fortified/functional, weight control, lifestage,
breed-/size-specific, gourmet, and are increasingly showing up
not just as human style but as "human grade." In fact, the
number one package claim during the first half of 2006,
according to Datamonitor's Productscan Online, was "upscale"
(appearing on 94 new products).

Other top claims included "high vitamins" and/or "high
minerals" (96) and, of course, "natural" (90). Trumpeting the
progress of premium petfoods, US households earning more than
US$70,000 annually now account for almost half of all consumer
spending on petfood in the US, up dramatically from just 15% in
1994.

The big picture

US retail sales of petfood totaled US$14.5 billion in 2005,
growing 4.4% that year and reflecting a 2001-2005 compound
annual growth rate (CAGR) of 5.4%. Following are percentages of
total US petfood sales by species:

Dog food 60%;

Cat food 34%;

Other petfood 6%.

By form, US petfood sales percentages through IRI-tracked
outlets are:

Dry food 56%;

Wet food 30%;

Biscuits/treats 14%.

Mass merchandisers have assumed the lead among petfood
retailers, claiming 34% of sales in 2005, whereas supermarkets
have continued to decline, to just 26%. Expansion by PetSmart
and Petco, with combined 2005 sales of US$5.4 billion, has
resulted in a slight share gain for the pet specialty sector,
albeit mostly offset by declining sales among independents. On
the mass-market side, Wal-Mart and Target have identified pet
supplies as a key growth category, revamping departments and
introducing upscale natural and private label products.

Four other companies claim shares in the 10% range: Mars,
Iams (Procter & Gamble), Hill's Pet Nutrition
(Colgate-Palmolive) and Del Montewith the latter joining the
group via its 2006 acquisitions of the Milk-Bone line from
Kraft and of Meow Mix from Cyprus Group. During 2005, leading
petfood marketers spent nearly US$300 million on consumer
advertising, with PetSmart and Petco kicking in another US$57
million.

Pet population trends

In its 2005-2006 National Pet Owners Survey, the American
Pet Products Manufacturers Association reports that the
percentage of US households owning pets is at its highest level
ever, with 63% of US households, numbering 69.1 million, having
a pet in 2004, up 7.6% from 64.2 million in 2002. Much of this
growth is coming from a rise in the number of pets per
household, with the percentage of households keeping two dogs
increasing from 7.9% in 2003 to 9.3% in 2005 and the percentage
keeping two cats going from 6.4% to 7.9%, according to Simmons
Market Research Bureau consumer survey data.

Perhaps even more important than this overall growth is the
rising number of senior pets, due to better veterinary care and
pet owners' desire to keep their pets healthy. Moreover, longer
lives for pets mean deeper emotional bonds between pets and
their keepers, and thus an even greater willingness among pet
owners to invest in higher-quality foods. Almost half of all
dogs and cats are 6 or more years old, and this is very good
news for premium-priced foods, nutraceuticals and supplements
designed to increase longevity.

Among the most important premium petfood demographics are
couples without children, including DINK (dual-income, no kids)
couples and older "empty nest" couples, which are growing in
number. The percentage of two-adult households without kids who
own dogs or cats rose from 48.8% in 2003 to 55.5% in 2005,
while all households without kids increased their share from
58.0% to 63.2%. People without children are understandably more
likely to purchase more expensive pet products and services,
since not having children frees up discretionary time and
income.

Dog food trends

US retail sales of dog food totaled US$8.7 billion in 2005,
up from US$6.8 billion in 2001 and reflecting a CAGR of 6.3%.
Viewing ongoing product upscaling as the primary market driver,
we forecast annual gains averaging 6.1% through 2010.

More dog food SKUs (including various flavors, sizes and
packaging) appeared during the first six months of 2006 than in
all of 2005, at 743 and 696, respectively, and almost as many
new products (148 vs. 158). Health-related products continue to
spearhead the premium product thrust, including
natural/organic, functional/nutrient enhanced and special diet
(lifestage, weight, health condition and breed). While the big
push a year or two ago was toward human-style novelty-type
foods for dogs (pizzas, candy, etc.), the emphasis has since
shifted toward human-grade fare, often overlapping with
natural/organic.

Cat food trends

US retail sales of cat food totaled US$4.9 billion in 2005,
up from US$4.1 billion in 2001, and with annual sales gains
averaging 5.1% forecast through 2010. Variety and gourmet
flavors continue to proliferate, with the products increasingly
trending toward more human-style fare. Also, as in dog food,
while natural and organic products continue to be mainly the
domain of pet specialty marketers, mass marketers are now
beginning to tap into this trend.

Other petfood trends

US retail sales of other (non-dog/cat) petfood reached
US$869 million in 2005, up from US$821 million in 2001. Bird
food (including wild bird food) accounted for 43% of 2005
sales, followed by fish food at 33%, small animal food at 17%
and reptile food at 7%.

Looking ahead

The conversion of US consumers to higher-priced petfoods
will continue as the primary market driver for the foreseeable
future. Echoing human trends, this will mean ever healthier
fare with increasingly targeted benefits, more convenient
products (especially preportioned and resealable) and
gourmet/luxury foods and treats keying in to pet owners' desire
to pamper their pets. At the forefront of the premium product
thrust will be natural and organic products, whose sales are
expected to top the US$1 billion mark by 2010.

We also predict a shift back toward wet foods in new and
more upscale package formats, as can be seen in recent entries
from Purina (Beneful Prepared Meals dog food) and Meow Mix
(Market Select cat food), as well as the emergence of a new
fresh petfoods niche designed to mirror, both in packaging and
in formulation, fresh foods for people.